Berko: Telecom, real estate trusts

My broker has recommend 1,500 shares of Consolidated Communications for growth and income. As you know, it yields 7.5 percent and is in the telephone/communications industry, which is growing faster than the general economy. Also, what do you think about the Vanguard REIT fund for income and as an inflation hedge? My broker recommends I buy 500 shares.

B.W. Wilmington, N.C.

Dear B.W.:
This year, Consolidated Communications Holdings Inc. (CNSL-$20.75) expects to sell $615 million worth of communications services – including long-distance and local phone service, digital TV, high-speed Internet and network capacity services over its fiber-optic network. CNSL’s business and residential customers live and communicate from their homes and businesses in Pennsylvania, Kansas, Texas, Missouri, Illinois and California. And CNSL’s $1.55 annual dividend, yielding 7.5 percent, has been unchanged since Citigroup and Credit Suisse First Boston took it public at $13 in 2005. While revenue growth has been consistent and nearly doubled in that time frame, earnings have creaked up and down like a broken elevator. And I can’t figure why a company that has never earned more than 94 cents a share (2009) insists on paying a $1.55 dividend; while doing so, it has created a working capital deficit exceeding $35 million.

Except for CNSL’s high dividend payments – a large portion of which comes from cash flow -– I can’t figure out why Reuters, S&P, Value Line, Raymond James, Jefferies, Wells Fargo and Davidson rank CNSL as a “buy.” Their recommendations further confound me because CNSL’s 5.5 percent net profit margins are half of those of others in the telecommunications industry. Here’s a company with $1.2 billion of debt that may report $640 million in revenues and 90 cents per share in earnings next year, and Value Line writes that CNSL’s “earnings momentum” and its long-term “total return possibility” make it worthy of Value Line’s “highest rank for timeliness.” I spoke with two analysts about why these big brokerages like this stock, and the best they would give me is: “Management is getting its financial house in order,” and “consumer and business demand is growing,” and “dividend coverage will improve due to better product and service offering.”

Yep, the dividend is attractive. It was steadfastly maintained through the thick and thin of the most recent economic downturn, even though revenues fell by more than 10 percent. My concern is that CNSL may not be able to come through another recession as well as it did recently, especially if interest rates rise as many expect they will. Frankly, I can’t find a compelling reason to own 1,500 shares. However, sometimes you get what you pay for. My opinion cost you the price of this paper, and your broker’s opinion will cost you a commission of $325, so perhaps you ought to take a bite but just buy 500 shares.

Vanguard REIT (VNQ-$74.22) is an exchange-traded fund. Its share price since 2004 has moved up modestly from $55, but its stinky up-and-down dividend has averaged 3.3 percent, giving investors a 10-year total return of about 6 percent. VNQ tracks the MSCI U.S. REIT index – which includes office, mall, apartment, industrial, hotel and health care properties – and is one of the 687 funds offered by Vanguard. Although a 6 percent total return over 10 years is OK, I wouldn’t touch this thing with a scythe, because there are so many better real estate investment trust opportunities out there. One that I have frequently recommended is W.P. Carey Inc. (WPC-$63.99), a global REIT paying a 5.6 percent dividend that has been raised annually for the past dozen years while its share value has doubled. WPC is a much better inflation hedge than VNQ.

Meanwhile, because you’re capable of investing $30,000 at a pop, you should consider employing an experienced, caring money manager to guide you.